Below you will find two hypothetical business transactions that your "clients" will be entering into. Help your clients structure the business transaction they desire in the most tax efficient manner possible. Describe the most likely tax treatment of each proposed transaction and support with substantive law. Make suggestions about how the transaction may be restructured to get better tax results without deviating too much from the proposed business structure. You are expected to take an aggressive pro-taxpayer position. Justify your position. Major points will be given for making creative arguments; major points will be taken away for missing important tax issues.
Relevant facts follow. When necessary make reasonable assumptions about the facts you don't know, or describe how unknown facts may alter the tax treatment.
Focus only on the income tax, unless otherwise instructed.
Case 1.
Best friends and musicians Freddie, Brian, Roger and John have decided to form a music band. They will travel the world, play and sing and make lots of money.
Each of them will participate in the band (i.e., sing or play an instrument or both). In addition, each of them will contribute the following to the success of the band.
Freddie brings to the band his awesome voice and a colorful cape. The cape is worth $40, but Freddie got swindled when he bought it, and paid $60. He didn't have that kind of money and had to borrow it from his dealer.
Brian had designed and patented a guitar. He will give the band the guitar and the patents. He believes that if he was to put the guitar on eBay, it would sell for at least $750.
Roger has an old set of drums that he bought for $1 from a kid down the street. He has been banging the drums in his parents' garage for years, practicing. About two months ago he started getting paid to bang on the drums at a local club. He believes that the club hired him to cover up the screams of police informants getting beat up upstairs, but he is still glad to be playing his music. The old drums are too shabby for the new band. He wants to get rid of his old drums and get new drums if he can do so without giving a penny to the government. He thinks that he can sell the old drums for about $200 and the new drums will cost at least $500. Either he or the band members will need to borrow the difference from their respective parents to buy the new drums.
John is just a bass player and has nothing of value to contribute to the band. To get into the band he has agreed to give the band a minibus worth $1,000 that he found abandoned on the street and a beautiful gold cape that he paid a seamstress $50 to make and is worth $100. Freddie, John and the band have decided that following the first successful performance, Freddie will get from the band John's gold cape and John will get from the band Freddie's colorful cape.
John is not crazy about being a rock star, he would rather practice accounting. His friend Ringo told him that if John ever wants out of the band, Ringo will buy his place in the band. Ringo is offering John $1,100 and told John that the offer will be good whenever John is ready to accept it. John wants to figure out a way to lock in Ringo's offer, and maybe even get some money from Ringo today. John is not willing to pay any income taxes today.
The four friends have decided that they will split everything evenly. They have also decided to memorialize their intentions and obligations in a joint venture agreement.
On a side note, John's friend Ringo is considering a career as a real estate developer. Just a few weeks ago Ringo looked into acquiring a piece of raw land for $2,000 and in his mind had started subdividing the land. For now, the subdivision activity has been limited to the lines he has drawn with his drum sticks in the land, designating future lots. Ringo already owns a hunting lodge in the mountains (he doesn't hunt, but he makes a few bucks letting his friends hunt) and is thinking of selling it to his friend Mick to help pay to acquire the land. The hunting lodge is probably worth $3,000 and has $500 of debt on it. Ringo is in the process of refinancing the debt to bring it up to $1,000. He will use the additional $500 for a new haircut.
Mick and Keith, when they are not using the hunting lodge, operate two guitar stores through Bloody Hell, LLC. They recently had a falling out and decided to go their separate ways, with each one getting one store.
Advise all the rockers on the most tax-efficient way of achieving their goals and discuss how the Freddie, etc. joint venture should be structured and the tax related provisions that should be included in the joint venture agreement. Do not discuss provisions that are common to all joint venture agreements. Focus on the provisions specific to this joint venture. Help Ringo with his real estate situation and help Mick and Keith to go their separate ways. You are to cover all the tax issues and tax consequences you can spot.
For extra points, you can discuss a basis shift transaction (transferring basis from one asset to another).
Case 2.
Branson Holdings ("Branson") is a large, privately owned corporation involved in numerous money-making industries, from real estate development to zeppelin joy rides. Dick, a dual citizen of the US and the UK, is the sole shareholder of Branson.
Dick has been approached by his buddy Vlad, a Russian oligarch. Vlad would like to buy the entire City of Las Vegas to impress his mistress. He will commence the acquisition process by buying all the outstanding interests in City Center, LP, a Nevada limited partnership that owns casinos, hotels, restaurants, shopping malls and a shoe shine stand on the Las Vegas strip. Vlad would like Dick to be his business partner in the acquisition of Las Vegas.
Both Vlad and Dick will be contributing cash ($50 million each). Vlad will also contribute miniature giraffes that will walk the property and delight the guests. Vlad thinks that the giraffes are priceless. Dick will be contributing his know-how of acquiring, developing and running a real estate project in the U.S. The value of his know-how is equally priceless.
Dick's wealth is mostly tied up in real estate and interests in closely held ventures. He will likely need to sell some real estate to invest in the acquisition of City Center.
Casino 1 is in the process of being built. Another $30 million will need to be invested to complete construction.
Dick, Vlad and the current owners of City Center have agreed that City Center will be acquired without applying valuation discounts. The owners of City Center have indicated that they may be willing to restructure the transaction to the satisfaction of Dick and Vlad for a little bit more money. (They are also very much afraid of Vlad.)
Dick and Vlad are clear that they want a "50-50 partnership."
As a side note, it turns out that Vlad's mistress Lena is currently a resident of Fresno, California, where she runs a business of coaching women on how to snag a wealthy foreign dictator. A few months ago Lena purchased a condo in Las Vegas, and is spending a few days a month in the condo, visiting with Vlad. She may spend more time in Vegas once Vlad completes the acquisition of City Center. She had started preparing for that day by buying expensive art work for the Vegas condo and a turtle. Lena would like to stop paying taxes in California as quickly as possible.
Help the parties structure the proposed transactions in the most tax efficient manner possible. Identify how the transactions should be structured, if there are various alternatives discuss their tax consequences and which one you would recommend and why. Focus only on the federal income tax, with the exception of Lena. For Lena, focus only on state taxation.
For extra points, you can discuss a basis shift transaction (transferring basis from one asset to another).